But if you if you see, if we've gone back to Mars and they see we're gonna put interestries up from one point percent to four and a half percent, and you said places were only going to four by ten percent in the next year, people would thinking it optimistic. So actually, certainly, certainly it does not sound it's not
crazy way by any means. Okay, so effectively, John, Just for the record here everybody, John is predicting our housepress fall of significantly more than thirty not significantly more than that is too fortune, but I mean definitely funny. That was a Blueberg senior reporter and author of the Money Distilled newsletter, John steppec in a Twitter space, one of our best ever performing Twitter spaces, something to do perhaps with the very eye catching four cars or doominated forecast
for a huge drop in the housing market. I'm David Merritt and this is in the City, Bloomberg's podcast, connecting you to the stories and the voices at the heart of the City of London. So, as promised, this week, we are going to talk about the outlook for both housing and inflation in the UK, and to do that we're joined by our senior reporter Phil Audrick Are UK eco expert and senior reporter John Steppeck, author of the Money Distilled newsletter and as you heard the voice behind
an epic prediction for the housing market. John, let's start with you, still sticking with this third episode number. I think it's sent chills through London and Britain to hear you say that their house prices might lose a third of their value. Yeah, I mean late said that. It's very careful to see in real tims, which is after inflation, and obviously inflations relatively high at the moment um. Rightly, if you look bright in history, it's not like that
draystick fordcasts. Assuming that our host, please crash actually happens. The average and again real terms over the last four house price crashes are so since the nineteen seventies has been for prices to fall by about twenty seven twenty
eight percent. So in the seventies, for example, house places never fell in nominal terms, but because of the high rate of inflation during that period, you actually get a real terms fall of about thirty percent between nineteen seventy three and nineteen seventy seven, whereas in the two thousand and eight crash. For example, you had twenty seven percent fall from peak to trough. Most of that was nominal terms because inflation obviously was absolutely tiny after the financial crisis.
So the act in terms of the actual scale with the peak to trough fall is not actually outlined. Is it's not an outlier? Um. The question is obviously, look why would that happen? And the very simple answers is because interest rates have gone up. People always talk about how physical supply will prop up the market, or you know there's a shortage of housing, etcetera, etcetera, but not the physics. I mean, you can complain about the physical
supply houses in this country. You can think that planning systems to restrictive. There are all manner of reasons to reform the way we built houses and what we do the house seas and how we sell houses, etcetera, etcetera. For the fundamental driver of the price and the reason that's so unaffordable just now, it is because interest rates have been on a secular downtrend for about thirty five
forty years. So when interest rates go up, the amount you can borrow for a mortgage goes down, which means that basically the price of houses has to come down. It's a kind of it's almost an arithmetical uh, kind of logical following um. And so obviously interest rates have gone up this year, they've started to take down a little bit. I think it's very unlikely they'll go back to zero s because that was an aberration. Well, now I think in an era inflation is going to be
higher on a kind of long term basis. And even if that just means that the average is about three percent over the next ten years, that means interest rates are going to be hiring again. And that means that house places have to connect. So you are sticking pretty vamily by this. It sounds like it might even be a sort of modest forecast. Steve, you're training and taste me strong, go stronger, absolutely fill. What's the implications for the economy as a whole of it? People losing a
third of the value of their houses. Well, that's the interesting because that the prices set by the marginal buyer. Right, So just because somebody doesn't have as much money to spend on the house because they can't get as large a mortgage. Now the interest rates have gone on means that they will bid less, and so then all these house prices which will which are related to you know, if you're buying a two bed house and there's another two bed house nearby, it's going to have a new
value because that's the that's the new market value. And so if you're staying put, it doesn't really make an awful lot of difference. That The factors which really are significant, obviously are whether unemployment is going to be shooting up and people are selling into negative equity because they have to get rid of this enormous debt trap that they're stuck with, which is the mortgage, and so that that's basically the most the most critical factor in terms of
the economy. The other, the other, the other impact is obviously the wealth effect. People don't feel that they've got this enormous amount of wealth which they can they can release if they need to, then that just makes them spend a bit less. But before the financial crisis, people were releasing their equity. There's these equity release mortgages. People take more and more money out of their house as the house's value went up, and then they would spend
all this extra money. But that's really not been a sort of something that's happened since the financial crisis, so because they haven't been able to write, the banks aren't well doing those schemes, and they can you can remore. You could remortgage every time you've paid off like twenty percent or whatever, I know, tem tempers, and you could then re mortgage up again. And also if the value of the house has gonna be and you have you know, viewing,
your earnings have increased, you could remortgage again. But it just hasn't been as much of a factor. So I don't think the the economic impact of falling house prices will be as dramatic as as has been seen in the past, for the for that sort of slightly muted wealth effect, and also for the fact that really what what will define whether the housing crisis trans transmorse into a absolute economic crisis is if it's accompanied with this
unemployment shock, which then causes massive sales. And the only part of them housing Mike where you can really see that happening a little bit is the buy to let and where they're all on interest only deals, so they're going to get really whacked by the increase in interest rates. That's gonna be that's gonna be a direct that's gonna be felt much harder than on the repayment side. Um, and they're going to start I mean, the banking was saying this last week that they're going to start selling.
They expect the bit to let guys to start selling and that will put more pressure on those sort of marginal prices. So you're you can get you can get closer to to the apocalyptic forecast from John. But you know, so if John's right about interest rates sticking around that, you know, even if it's three percent or so for a while, there's this rolling impact, doesn't there from that of people remortgaging or their deals, they're very low rate
deals coming to an end. I just did mine a couple of months ago, and it's a bit of a shock, right, Suddenly your payments are going up a lot. How are we seeing that effect? And that's only gonna get worse, isn't it? Throout the people are gonna have less money to spend in this economy for years to come on they because of what's happened to interest rate, there will be that people will have less. But you know, in a way, having the fixed deal means that you can
plan for it. You've got you know, you know it's coming down the line, and you can start you can start planning for it. That will depress consumer spending. But the it's not having as dramatic effects as you know, these rate rises as would have had in the past. You've got the banksters. Over the next year, we're going to have four million mortgages in total, either they're on a one point three or on standard variable rates so
they're just floating um. And there's another two point seven uh that are fixed rates that are going to be refixing. Then you also have actually about five million people in private rent rental who will probably get all of these interest rates passed directly onto them as their as their rents go up as the landlord tries to recover his
his higher mortgage costs. So that's about nine you know, that's about nine million households out of at twenty eight million households who are going to feel directly affected by this. There's going to be some blood path there's going to be some horrible, horrible experiences for some people that isn't inescapable.
But when you're looking from the economic point of view, looking at the aggregate picture here and that that isn't enough to make you terrified that there's going to be, you know, some kind of economic devastation through this channel. I might take anything. I mean, rates gonna peak anytime soon, John,
have you watched your fore cost for NAT year? I mean, obviously the market, I think streets are going to peak or the Bank England entrist street is going to pick up a bit four and a half percent next year. And I can see the inflation is properly highs peaked, And I don't actual think inflation is going to be the big body fund next year. I think, toy, we have the supplieses will start coming in as that we get to four and it doesn't go back down to
what we've seen in the past. I think that's one thing. But I mean, I agree we haven't the Phillips said, I don't think the housing market itself is as much of a problem for the wider economy as it was in for example, two thousand and eight. Um. You know, it's We've had quite a lot of statistics point out that the people who have mortgages at the moment tend to be better off than you know, the average because affordability is so bad. I mean, a lot of people
have just been squeezed out of there. You know, in banks aren't as vulnerable to it either. And the other good things that wages are going up, they're only growing up in nominal terms, cause inflation is so high we're still kind of losing it in real terms. But I mean, the private sector can average pay rise at the moment is over six percent, which is quite don't certainly chunky compared to the recent past. If that can continue by inflation comes down, then you know you've got you know,
cross your fingers. Maybe you get a point where real wages actually start to go positive um and as long as unemployment doesn't pick up, then you could have a pretty shallow recession and not an awful outcome again and aggregate um and still have how spaces coming down and
actually affordability improving. And then maybe take this sort of the silver lining for this for those people who want to buy a house, right, it's actually kind of they're going to sit on their hands for a bit, right and see that the thirty percent drop in prices, it's going to mean a lot of more people can get in the house and ladd al right, I mean it's going to be and that is that actually gonna be that positive for the economy as a whole. It would
be good politically. I mean, I think something that well, I mean the overall eventually be a good thing. I mean, it's I think we've kind of perhaps lost sight of the fact that houses really should be affordable. You know.
It's like, at the moment, I mean accordantly were in s how space affordability relative to income, the average hosen now, of course nine times the average income, and that is the highest ever they can A long run average is closer to something like three and a half four and a half, and that has ticked higher over the years.
About nine is nine is ridiculous, um, And really I don't think that you know, in an ideal world would be living in a country where everyone could afford to buy a house or rent a house and they weren't constantly worrying about the impact of the coast of simply having a roof over their heads on their standard of living. It's not great for productivity or intergenerational stability and all those things. So if we get a decent sized correction in the house and market, then you take some of
the sense that young people have of, you know, basically futility. Um, it is certainly a sense I get from talking to some of them even around to here. And you know, if you're working in the Bloomber building, you're not going to be the most deprived young person in the world. So, um, you know, I think it would be a very positive thing. You see some sort of relief on the house price front. Yeah, they so that. I mean because obviously the barrier has
been deposits. Um, you can't get the deposit too. You can get the debt, you can't get the depot that. So if the property price comes down to you're more
likely to be able to get the deposit. Plus, if your salary has gone up by six and a half percent and you know you're earning four percent on what little savings you have or whatever, then um, you know it just it's all kind of moving in the right direction in terms of helping, uh, that intergenerational furnace, that that equity, which is part of social division at the moment, so absolutely would be in some ways were supposed to be in recession. Right, this is what we're being told.
And you said, John, maybe that's quite an optimistic view that perhaps we come out of this it's a little bit shallow. At the Bank of England have said some pretty bad things about but the forecast, what sort of recession are we really going to be in for the rest of the next year and when are we going to come out of it? Fair? The Bank of England's forecast was based on a projection for interest rates to to get to something like five and a half percent.
I feel like that's not gonna happen, but I mean it may, but there's every single everything is aligned. I mean, but politically and on monetary policy, there's no desire to go to that level of interest rate. At the moment interest rates of three and a half percent, they may get to to four and a half percent, but even even at three percent, the banking was forecasting a shallow recession.
But I had this weird number in its forecast, which was that the households typically in a recession to go into their savings because they that's what you're savings are there there your buffer And in this forecast the Bank of England has them increasing their savings, so they're saving more and more, which just you know, if you and the o b R had a very different take on that. They said that people will use their savings and as a result, they said, the forecast in the o B
report was much shallower than the Bank of England. And there's no individual macroeconomic instability. There isn't like massive debt overhanging the corporate sector. There isn't a massive debt overhanging the in the household sector. To be compared with the financial crisis. The banking sector isn't about to collapse because it's running on paper thin levels of capital. There hasn't been a splurred in business investment or commercial property building.
You can't see something which is just going to cause the economy to to just implode at the moment. So it's just the interest rate effect and people and it's really that's that that's what's bearing down on on on the growth prospects of the country by taking demand of the economy. But the I don't I just don't see that as being anything other than this kind of brief, shallow recession. So why why is the Bank of England
being so gloomy? What is it? What's wrong? It's a good question, um, I mean, obviously there's been a lot on Moyle and I mean, am I like to see
the ask covering on this? I think that I think there is an element to that because you know, there's quite a lot of might slang in between the politicians in the Bank England during the over the over the summer in fact, right, you know, the bean counters, and they had also the bank had a very prerogative in the in its forecast because at that point Marcus are saying rates are going to go to five and a half percent, and it wanted to send a very clear
signal to the markets that you're completely wrong, boys, just you're you're just out of the park wrong. So we're going to are using your projections, we're going to show you that the scale of the recession that that's causing is so nonsensical that we're never going to do that. So they were just so this is the communication mechanism, which seems to be a little bit sort of obtuse
to have to communicate in this way. But so the overstatement of the recession is effectively a way of saying it's you know, our rates are never going to go that high. That was that was the main point of the of the recession. Forecast, which is obviously at the same point, telling everyone to prepare for a catastrophic recession is not particularly good signaling to the general public. But you know that they're kind of thinking about I guess thinking about what you said, I mean, over the summer.
It's kind of feels like a lifetime ago, perhaps, But you know, they did have to step in to stop the sort of systemic collapse of the pensions industry, you know, So the firefighting that happened over the road there from where we're sitting, it was real, right, And so maybe that explains some of the tricky thing where they had to be that forecast kind of between statements as well, didn't they saw they weren't really able to take a count of what the first school statement may on me.
And I see there's an element that they've being a kind of warning shot across the government's posed in his way out of the second point, because they've they've the latest bank of the latest rate setting minutes say that about a third of the forecast recession has been removed by the by the fiscal stimulus in the in the autumn statement, right, so it's better already, there's already better. So what else could spoil the party next year? John, do you think I mean, you know, it sounds like
we're gonna we're gonna come out of recessions sooner. Inflation is already past the peak. You're not worried about anything next year? I mean, yeah, I mean think the main ones, the energy places. I think it's probably the biggest wiy
old card, and that could go. That could go two weeks, you know, so energy places could follow a lot faster than we expect, and that would be great obviously, But equally, you know, there's old manner the reasons that you could potentially spake in either oil prices or gas bases on both um, and that would definitely make things much trickier a lot. It does end join employment. I mean, if unemployment starts to go up, then I do think to an extent all bits out off it could give strange.
So this recession is this is not an unemployment led recession, is it. At the moment, we're still seeing the jobs market hold up, and we're seeing those pay increases as well that you mentioned. It's it's a bit of an odd feeling for recessions that people are keeping their jobs. Yeah, at the moment and the at the moment that there's still over a million vacancies out there. So the thinking is that the companies are just going to stop planning
to hire people. And so that's that's what you know, where the where you can absorb some of the redundancies in the in the labor market and also um, you know, people as they roll out of jobs, they'll basically just retire or leave the country or something, and so that's
clearly what they're planning. Businesses are not currently planning huge redundancy arounds because they're finding it's so hard to hire people that the last thing they want to do is get this what used to be this incredibly easy asset to get hold of, which was a worker, It seems to be now incredibly hard to get old of one. So you don't want to just just ship them out for without without very very very good reason to do that.
But it's unemployment. The Bank of England's forecast for unemployment was in its disastrous scenario, was for a five increasing unemployment, which is pretty mild, which is actually exactly precisely is it is relatively modern and so that was even under its under its bleak scenario The only other thing is maybe a and I don't really know how lately or unlikely this is, but some sort of sovereign debt crisis
somewhere somewhere in the world, probably not in Brent. We nearly had it, but we're actually not the most vulnerable from that point of view. Um, you know, we've our debt to GDP is high, but it's not like insanely high. I mean, I guess if there was going to be something that that would probably adopt in the Euro's own because that's the best where it's hardest for them to
step in and fix it. But even then, I mean, the kind of e CV has kind of got a license to print money if it needs to and extremists that they didn't have in two thousand and eight. So I do think maybe a sovereign debt issue, But even then that's kind of an outside yeah, And there's so the UK is more alone on the kind of of strangers than you know, to quote Connie, basically, foreign investors are buying our debt um and next year we're issuing
an absolute glass in this stuff. The Bank of England is selling off eight billion will be about forty of the guilts it's holding. So basically the Bank in England and the Treasury going head to head and trying to you know, compete for people to buy their guilts they're selling um and that is a huge area of vulnerability in the UK. We tested the edges of that didn't me in the summer exactly with disastrous exactly so the financial so financial stability upset in core markets like you know,
government bonds um. That genuinely could be one of those kind of complete left field shocks. You know, obviously Ukraine and Russia, that whole situation escalating UM and you know, some terrible geopolitical mess with China or that that kind of stuff could all that. But but of the sort of more visible possibilities, the financial, the financial stability issues which come with issuing so much debt next that next year, that that could be that could be one of our
Achilles heals. And the politically, just to kind of maybe wrap up, you know, where do we see this government headed next year? Are we going to make it through the whole of next year without having an election? I mean, can sooner keep this Conservative administration together? Unruly like they don't only manage the Tories that it's um, you know, he he's had to scrap his his planning reforms temporarily because they're pretty they're completely unpitable, don't the moment exactly
I mean that. So if he I mean that, I can't. I think if they can't get the business of government working, then it's hard to see how there can't be an election next year. But they're also the Tories are incredibly apt at survival and you know, the idea that they're going to kind of self sabotage themselves. Basically. One thing to think about there is if the election is called,
not until they're very late potentially um. And by that point, I mean to your point about you know, wages have risen to the level of wages has gone up, and at that point you may see inflation just through you know, the mechanism of energy prices falling, etcetera. And may see inflation below zero temporarily or around zero and it would just be a temporary thing. Um. And so you you would have this, you know, this wedge opening up where
people are definitely seeing pay rises larger than inflation. There would be there could be a period of you know, if if growth is recovered um, you know, we would have had eighteen twenty four months to try and fix some of these immigration issues, sort out some of the Northern Ireland partnership stuff and which could then get get
a little bit of more economic momentum going. You know, you could you can see that gap narrowing to get to get pretty tight if people are feeling at that point point in time, you know the the you know, their earnings are paying for more. Um. You know that they're not seeing real terms declines in the new standards at that point, and they can afford a house right because it's going to be cheaper than it was, right.
So it's a sunnit uplands. I don't know how we've ended up there the opposite of the Bank of England around here, right. This is just going to talk the British economy up right. Well, thank you so much to John Stepec and Phil Audric. Thank you thanks for listening to this week's in the City. We'll be back next week, but in the meantime, if you like our show, please head on over to Apple Podcasts or wherever you listen
to podcasts and rate, review and subscribe. This episode was hosted by me David merrit was produced by Summer Sadi editing and sound designed by Blake Maple's Special thanks to John stepec And foril AUDERIC, and be sure to check out John's news letter, Money Distilled